Stocks, bonds and recessions
It depends on who you listen to and what you want to hear. I will say, again, that we are inclined to seek information that confirms what we already believe. Sometimes it’s like “don’t confuse it with the facts, I’ve already made up my mind”. This seems to be true for political, economic, community and even theological dialogue. It is also said that humans were given two ears and one mouth for a reason. Perhaps it is more important to listen than to speak! Sometimes it seems easier to talk to each other than to really listen and come up with a meaningful solution, giving an exchange of ideas.
So, out of my soapbox. I’ve heard some say that the economy and financial markets are heading towards the reservoir (I think that means a downward direction). Others say the opposite. Everything you think is probably true for you. Feeling very strongly both ways is difficult, but sometimes being in conflict over important issues is, it seems, completely normal. It might be a very uncomfortable way to feel, but it seems like we have to go through such things. As this is all about your (and mine) investment accounts, I will continue to follow my “credible consensus”. If, or when, I discover that I am wrong and things have changed, I intend to tell you. For now, being realistic is synonymous with being optimistic.
This week, I consulted various research sources. Yes, I saw the “are we in a recession?” question raised a few times. Now I spend a lot more time thinking about the stock market than the bond market. I am fully aware that the bond market (we call it fixed income) is much bigger than the stock market (we call it stocks). This is both in terms of monetary value and the number of securities issued. However, when you see me and ask “how is the market doing”, I think you are usually referring to stocks. They seem to garner the most headlines and casual conversation. This week, I found the guys at Nuveen, one of the world’s largest bond managers – primarily open-ended and closed-end mutual funds – to provide compelling insight. Anders Persson is Chief Investment Officer and Group Head of Nuveen Global Fixed Income. In his weekly commentary, he admits that this year has been difficult for all bonds as well as for equities. However, year-to-date bonds have generally posted less negative returns than equities. The broad bond market index (which includes sectors ranging from asset-backed securities to emerging market debt) is down 10.3% year-to-date. This happens when interest rates rise. Meanwhile, a similar broad index for stocks is down 20%. So what does he conclude? Bond yields have become more attractive with the recent substantial increase in interest rates. Year-to-date losses create a better entry point to buy fresh money. Higher rates should benefit floating rate products like loans, as well as shorter duration markets like high yield credit and some emerging markets. It concludes that although their outlook for economic growth has deteriorated somewhat, they do not expect a recession this year.*
Even my former standby source, Brian Wesbury, chief economist at First Trust Advisors, this week titled his Monday Morning Outlook “Still No Recession.” He gave six clear reasons why! ** If you caught him on Fox Business this week, he continues to state his confusion that no one is talking about the money supply problem, while everyone is obsessed with interest rates and inflation. And unless you’re under a rock this week, you’ve heard Federal Reserve Chairman Jerome Powell say we’re not in a recession. The market reacted like a rocket!
As for me, I am not marketing any investment products to the public these days. I do, however, own Nuveen tax-exempt bonds (closed-end and open-ended mutual funds). I also own several large cap stocks paying high dividends. I stay where I am until a believable wind turns and points me in what appears to be a more cautious direction. I will continue to seek out everyone’s “best ideas” and execute the ones I understand. I am open to your suggestions
The opinions, forecasts and views expressed herein are those of Tommy Williams and do not necessarily represent those of Williams Financial Advisors, Private Client Services, RFG Advisory, their employees or their clients.
This material is for educational and informational purposes only. It is not intended as legal, tax or investment advice, or a recommendation to buy, sell or hold any specific security, or an endorsement of any specific trading strategy. Always consult a lawyer or tax professional regarding your specific legal or tax situation.
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*Anders S. Persson, Chief Investment Officer, Head of Nuveen Global Fixed Income-Weekly Commentary titled “The Fed’s Inflation Battle Creates Opportunity” dated July 19, 2022
** Brian Wesbury, Chief Economist – First Trust Advisors, Monday Morning Outlook titled “Still No Recession” dated 07/25/2022